ACCOUNTING PROCESS

The accounting process is a
series of activities that begins
with a transaction and ends with
the closing of the books.
Because this process is repeated
each reporting period, it is
referred to as the accounting
cycle and includes these major
steps:
1. Identify the transaction or other
recognizable event.
2. Prepare the transaction's source
document such as a purchase
order or invoice.
3. Analyze and classify the
transaction. This step involves
quantifying the transaction in
monetary terms (e.g. dollars and
cents), identifying the accounts
that are affected and whether
those accounts are to be debited
or credited.
4. Record the transaction by
making entries in the appropriate
journal, such as the sales journal,
purchase journal, cash receipt or
disbursement journal, or the
general journal. Such entries are
made in chronological order.
5. Post general journal entries to
the ledger accounts.
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The above steps are performed
throughout the accounting
period as transactions occur or
in periodic batch processes. The
following steps are performed at
the end of the accounting
period:
6. Prepare the trial balance to
make sure that debits equal
credits. The trial balance is a
listing of all of the ledger
accounts, with debits in the left
column and credits in the right
column. At this point no
adjusting entries have been
made. The actual sum of each
column is not meaningful; what
is important is that the sums be
equal. Note that while out-of-
balance columns indicate a
recording error, balanced
columns do not guarantee that
there are no errors. For
example, not recording a
transaction or recording it in the
wrong account would not cause
an imbalance.
7. Correct any discrepancies in the
trial balance. If the columns are
not in balance, look for math
errors, posting errors, and
recording errors. Posting errors
include:
posting of the wrong amount,
omitting a posting,
posting in the wrong column, or
posting more than once.
8. Prepare adjusting entries to
record accrued, deferred, and
estimated amounts.
9. Post adjusting entries to the
ledger accounts.
10. Prepare the adjusted trial
balance. This step is similar to
the preparation of the
unadjusted trial balance, but this
time the adjusting entries are
included. Correct any errors that
may be found.
11. Prepare the financial statements.
Income statement: prepared
from the revenue, expenses,
gains, and losses.
Balance sheet: prepared from
the assets, liabilities, and equity
accounts.
Statement of retained earnings:
prepared from net income and
dividend information.
Cash flow statement: derived
from the other financial
statements using either the direct
or indirect method.
12. Prepare closing journal entries
that close temporary accounts
such as revenues, expenses,
gains, and losses. These accounts
are closed to a temporary
income summary account, from
which the balance is transferred
to the retained earnings account
(capital). Any dividend or
withdrawal accounts also are
closed to capital.
13. Post closing entries to the ledger
accounts.
14. Prepare the after-closing trial
balance to make sure that debits
equal credits. At this point, only
the permanent accounts appear
since the temporary ones have
been closed. Correct any errors.
15. Prepare reversing journal entries
(optional). Reversing journal
entries often are used when
there has been an accrual or
deferral that was recorded as an
adjusting entry on the last day of
the accounting period. By
reversing the adjusting entry, one
avoids double counting the
amount when the transaction
occurs in the next period. A
reversing journal entry is
recorded on the first day of the
new period.
Instead of preparing the financial
statements before the closing
journal entries, it is possible to
prepare them afterwards, using a
temporary income summary
account to collect the balances
of the temporary ledger
accounts (revenues, expenses,
gains, losses, etc.) when they are
closed. The temporary income
summary account then would be
closed when preparing the
financial statements